Thursday, April 29, 2010

More on Europe, Greece

I covered emerging market sovereign bonds for many years, but I’ve never seen anything like this: a country trading at levels where the bear case is terrifying, the bull case is very hard to articulate, and everybody is talking about a possible default even when the country has an investment-grade credit rating from two agencies and is only one notch below investment grade at the third. Maybe the only thing which really explains what’s going on is that both yields and ratings are sticky. Which would imply that Greece has a long way to deteriorate from here.

It's also, in a way, kind of awesome. An astute commenter on WRM's blog yesterday noted that Americans should take no pleasure from the E.U.'s troubles right now, since what is bad for the E.U. will eventually be bad for America, too. True enough. And certainly, that's the mature response.

However, since we can't alter the outcome in any meaningful way, why not enjoy the spectacle? After all, these are the same twits who've been lecturing us about how the "era of American hegemony is over." Suck it, Europe!

I kid, of course. Europeans are our friends and allies. They're like like that kind of annoying guy you always hung out with in college. Pretentious and kind of an ass, but he'd been with your posse for so long that everyone just kind of went with it.

But the PIGS financial crisis does revive some structural questions about the European project--all of which were completely foreseen decades ago. Namely:

* European elites viewed the euro as the practical means to a political union, since no currency union has ever existed without a political union.

* It was always obvious that a currency alliance in Europe could prove impractical, given a perfect storm of economic circumstances. If the E.U. encountered such dangerous waters before the political union had been boot-strapped into place, then there would only be unpleasant options available: (1) Massive bailouts--meaning wealth transfers from one country to another. (2) Reduction or dissolution of the eurozone.

* Even the end-goal of a political union was foolish. European elites wanted a political union so that they would be able to project power onto the international stage--power which, separately, individual European countries lacked.

By definition, though, the E.U. would only be able to project soft power. That's because modern Europe lacks the capability to project actual force in the world. This is both by design and necessity. First, few Europeans seem to have the stomach for force projection. Second, the cost of the European welfare state makes force projection difficult. Projecting force is expensive. And soft power without the capacity for hard power is no power at all.

Sooner or later, the Europeans were destined to figure this all out. Truth be told, the PIGS crisis is probably a cheap way of exposing the fallacies of the European project.